RBI: The financial system must be protected against FinTech risk.

by James · July 4, 2022

RBI: The Reserve Bank of India (RBI) recognized the importance of the FinTech sector in democratizing access to organized finance, but called for caution against the sector’s potential to generate volatility in the larger financial system.

According to RBI, large IT companies offering financial services jeopardize the stability of the financial system due to the potential for anti-competitive behavior and a pervasive impact from their intricate interconnected operational relationships with financial institutions.

The introduction of FinTech, according to the Central Bank’s 25th Financial Stability Report (FSR), has exposed the banking system to new risks that go beyond supervisory concerns and often cross other public policy objectives related to privacy, cyber security, consumer protection, competition and anti-money laundering policies. money.

It was emphasized that large technology has the potential to grow rapidly and endanger financial stability through greater dissemination of established institutions.

According to the newspaper published on Thursday, “Complex intertwined operational relationships between BigTech companies and financial institutions can contribute to concentration and contagion risks, as well as difficulties associated with likely anti-competitive behavior.”

Regulators and supervisors must find a difficult balance between encouraging innovation and controlling threats to the stability of the financial system.

In order to achieve shared principles for managing FinTech activities, including business and revenue models, management, behavior and risk management, it was stated that this requires more interaction between stakeholders, including regulators, the FinTech sector and academics.

The central bank continued to devalue cryptocurrency assets, claiming that they undermined efforts to control exchange rates and comply with financial rules.

In its Financial Stability Report (FSR), issued Thursday, the central bank stated that “BigTechs may scale up rapidly and represent a threat to financial stability, which may be due to increased disintermediation of traditional institutions.”

According to the study, which referred to an opinion poll, regulators and regulators around the world strive to weigh the risks and benefits of Big Tech’s entry into the financial industry.

The authorities must be aware of any new links between significant digital companies and existing financial institutions in the future.

The financial technology sector (FinTech) has experienced rapid expansion in recent years, according to research. The size of the global FinTech market, estimated at $ 111 billion by 2020, is expected to increase to $ 698 billion by 2030, increasing to a CAGR of 20.3%.

The FinTech sector in India, which is among the fastest growing in the world, has a valuation in 2020 of 50-60 billion dollars and is expected to increase to 150 billion dollars by 2025. India has the largest usage rate for fintech (87%), which raises $ 8.53 billion in financing (in 278 transactions) between 2021 and 2022.

According to the report, FinTech innovations are pervasive, especially in retail and wholesale payments, financial market infrastructure, investment management, insurance, credit supply and equity raising. This development can lead to significant changes in the financial environment.

The use of FinTech, according to the research, can promote financial inclusion, expand the range of financial goods and services, improve the efficiency of financial services delivery and improve consumer satisfaction.

Furthermore, there are concerns about potentially anti-competitive behavior as a result of the intricate operational links between BigTech companies and financial institutions.

The regulator went on to say that the development of FinTech has exposed the banking sector to new dangers that go beyond supervisory concerns and interact with issues such as data privacy, cyber security, consumer protection, competition and compliance with the rules against money laundering.

In addition, it can lead to improvements in risk management, including better insurance models, better targeted products and efficiency benefits in credit delivery procedures.

According to the research, regulators and regulators confront a complex balance between innovation friendliness and controlling threats to financial stability, which requires greater participation from stakeholders, including regulators, the FinTech sector and academics.

RBI has issued a warning about cryptocurrency.

According to central bank forecasts, India’s fintech sector, which is one of the fastest growing in the world, will be valued at $ 50-60 billion by 2020. It is expected to develop into a business of $ 150 billion by 2025. With an acceptance rate of 87 percent, India is a world leader in fintech, and it received $ 8.53 billion in financing through 278 agreements in the years 2021–22.

Separately, the bank regulator warned customers again to avoid the rise of virtual currencies, describing them as a “risk”. RBI Governor Shaktikanta Das noted in the report’s introduction that “cryptocurrencies are an obvious concern.” “Everything that derives value from imagination and has no substance is nothing but speculative behavior disguised as anything else.”

Technology has increased the reach of the financial industry beyond social strata and geographical boundaries, but Das claims that these benefits must be fully realized while remembering how they can jeopardize financial stability.

Cryptocurrencies, according to monetary authorities, are not currencies since they lack an issuer, an intrinsic value, and are neither financial assets nor debt instruments. Private currencies could potentially lead to the establishment of alternative currency systems, jeopardize sovereignty over the money supply, interest rates and macroeconomic stability, resulting in long-term instability and “dollarization” of the economy.

The newspaper claims that cryptocurrencies “can hinder the ability of emerging economies to manage their capital accounts, which has a negative effect on exchange rate management.” By enabling exchange rate and capital controls restrictions and preventing the effective transfer of domestic monetary policy, cryptocurrencies threaten monetary sovereignty. Falling prices and other problems with these assets can lead to the payment systems not working, which will reduce the actual economic activity.

The regulator issued a warning when central banks around the world began testing central bank-backed digital currencies (CBDCs), stating that switching from bank deposits to such instruments could reduce credit availability or increase credit costs. According to the BIS survey, “the majority of central banks are unsure about imposing restrictions on CBDC transactions or balances to reduce the risk of disintermediation.”

edited and proofread by nikita sharma